kinked demand curve
The kinked demand curve is a clever little theory that tries to explain a puzzle: why prices in many oligopolies sit oddly still, barely moving even when costs jump around. It rests on a simple guess about how rivals react — a guess that splits the demand curve facing one firm into two parts with a sharp bend, or "kink," right at the current price.
Here's the asymmetric logic. Suppose your firm is one of a few, and you wonder what happens if you change your price. If you raise it, you assume your rivals will not follow — they'll happily keep their lower prices and watch your customers stampede over to them, so you'd lose a lot of sales. That means the demand curve above the current price is very flat (elastic): raising the price is punished hard. But if you cut your price, you assume your rivals will follow at once — they won't let you steal their customers, so they'll match you, and you'll gain far fewer sales than you'd hoped. That means the demand curve below the current price is steep (inelastic): cutting price barely helps. Put the two together and the curve bends at the going price, kinking from flat-on-top to steep-below. The upshot: you lose either way, so you leave your price exactly where it is — and so does everyone else. The theory even has a neat mathematical flourish: at the kink the marginal revenue curve has a vertical gap, so a firm's costs can rise or fall within that gap without changing the profit-maximising price at all, which is just why prices stay so sticky.
The kinked demand curve is famous as a tidy explanation of price rigidity in oligopoly, and it captures something real — oligopolists genuinely are wary of moving first. But be honest about its big flaw: it explains why a price, once set, tends to stay put, but it never explains how that price got there in the first place. It assumes a starting price and then shows why nobody budges. Empirical studies have also found oligopoly prices are not always as sticky as the model predicts. So treat it as an illuminating story about one tendency, not a complete theory of how oligopolies set prices.
If one petrol station raises its price, drivers flock to the rivals who held theirs steady; if it cuts, the rivals cut too and no one gains — so each station, fearing both moves, simply keeps its price glued in place.
The kink explains why oligopoly prices can stay frozen even as costs move — but not how the price was set to begin with.
The model's well-known weakness is that it assumes the existing price rather than explaining it, and real-world evidence for the predicted stickiness is mixed. It's a useful intuition, not a settled law.